Q: Suppose the government increases its purchases by $50 billion. If the marginal propensity to consume (MPC) is 0.8, what is the total change in real GDP according to the simple government spending multiplier?

$$\frac{1}{1-0.8} \times 50 = 250$$ billion

Question 1

Suppose the Federal Reserve conducts an open market purchase of $10 billion in Treasury securities. If the required reserve ratio is 10%, what is the maximum possible increase in the money supply, assuming banks lend out all excess reserves and there are no cash leakages?

Accepted Answer

$100 billion

Question 2

Which of the following would cause a rightward shift in the aggregate demand (AD) curve in the United States?

Accepted Answer

A decrease in personal income taxes

Question 3

If the money supply grows at 8% per year and real GDP grows at 3% per year, what is the predicted inflation rate according to the quantity theory of money?

Accepted Answer

$$8\% - 3\% = 5\%$$

Question 4

Which of the following best explains why the long-run aggregate supply (LRAS) curve is vertical?

Accepted Answer

Because prices and wages are flexible in the long run, so output depends only on resources and technology

Question 5

A negative supply shock, such as a sudden increase in oil prices, will most likely cause which of the following in the short run?

Accepted Answer

A leftward shift of the short-run aggregate supply (SRAS) curve

Question 6

If the Federal Reserve wants to decrease aggregate demand, which of the following actions is most appropriate?

Accepted Answer

Raising the interest rate on reserve balances (IORB)

Question 7

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Unemployment insurance payments increasing during a recession

Question 8

Suppose the government increases its purchases by $50 billion. If the marginal propensity to consume (MPC) is 0.8, what is the total change in real GDP according to the simple government spending multiplier?

Accepted Answer

$$\frac{1}{1-0.8} 	imes 50 = 250$$ billion

Question 9

Which of the following best describes the effect of expansionary monetary policy in an open economy compared to a closed economy?

Accepted Answer

It is more effective in an open economy because lower interest rates also increase net exports

Question 10

If the U.S. government runs a budget deficit, what is the likely effect on national saving and investment, according to the saving and investment equation?

Accepted Answer

National saving decreases, leading to lower domestic investment and/or lower net foreign investment

Question 11

Which of the following would cause a movement along the aggregate demand curve, rather than a shift of the curve?

Accepted Answer

A change in the price level

Question 12

Which of the following is included in M2 but not in M1?

Accepted Answer

Small-denomination time deposits

Question 13

If workers and firms expect higher prices in the future, what is the likely effect on the short-run aggregate supply (SRAS) curve?

Accepted Answer

The SRAS curve shifts to the left

Question 14

Which of the following is NOT a goal of monetary policy pursued by the Federal Reserve?

Accepted Answer

Elimination of all government debt

Question 15

A country has the following balance of payments data: Current Account Balance = -$$50 billion, Financial Account Balance = 50 $$billion. What does this imply?

Accepted Answer

The country is borrowing from abroad or selling assets to finance its current account deficit

Question 16

Which of the following would shift the demand for U.S. dollars to the right in the foreign exchange market?

Accepted Answer

An increase in foreign demand for U.S.-produced goods and services

Question 17

Which of the following is a traditional tool of the Federal Reserve for conducting monetary policy?

Accepted Answer

Open market operations

Question 18

If the Federal Reserve lowers the target for the federal funds rate, what is the likely short-run effect on aggregate demand?

Accepted Answer

Aggregate demand increases

Question 19

Which of the following best describes the multiplier effect of government spending?

Accepted Answer

An initial increase in government spending leads to a larger total increase in real GDP due to induced increases in consumption

Macroeconomics Final Exam Study Guide: Aggregate Demand, Aggregate Supply, and Monetary Policy

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